No Duty to Mitigate Under Fixed-Severance Employment Agreements

A five-judge panel of the Court of Appeal for Ontario recently released its decision in Bowes v. Goss Power Products Ltd.1 The decision determined that an employee who is contractually entitled to a fixed notice period (or pay in lieuthereof) is not subject to a duty to mitigate his or her damages if the employment agreement is silent on mitigation. Before this decision, Ontario jurisprudence was conflicting with respect to an employee’s obligation to mitigate in these circumstances.

Background

Relevant Facts

Mr. Bowes entered into a contract of employment with Goss Power Products Ltd., which specified that he would be entitled to six months’ notice or pay in lieu thereof if his employment was terminated without cause. The contract did not address the question whether Bowes had an obligation to mitigate his damages by seeking alternative employment following his termination.

Bowes was terminated without cause. His termination letter provided him with his contractual notice entitlement (payment in lieu of six months’ notice in the form of salary continuance). The letter stated that Bowes was required to seek alternative employment during the notice period and that if he secured alternative employment during that time, his salary continuance payments would cease.

Approximately two weeks after his termination, Bowes secured alternative employment with a comparable salary. Goss took the position that Bowes was entitled only to his statutory termination pay, given that he had successfully mitigated his damages, and ceased making salary continuance payments to him.

Lower Court Decision

The application judge held that every employment agreement is subject to a duty to mitigate unless the agreement expressly or impliedly provides otherwise. The lower court reasoned that, just because the parties have agreed upon the period of reasonable notice, this does not imply that the obligation to mitigate no longer applies. The court agreed with Goss’s interpretation of the employment agreement and held that Bowes was entitled only to his statutory termination pay.

Decision of the Court of Appeal

The Court of Appeal for Ontario overturned the decision of the application judge, concluding that if an employment agreement specifies the amount of notice the employee will receive upon termination without cause and is silent on any duty to mitigate, the employee is not required to mitigate his or her damages. That is, in order for a specified contractual notice period to be subject to a requirement by the employee to mitigate, the contract must expressly say so. The Court’s reasoning included the following:

When parties contract for a specified notice period, they are choosing to opt out of the common law reasonable notice regime. Since a contractual fixed term of notice is not equivalent to common law damages for reasonable notice, the common law principles of mitigation should not apply absent a clear and express intention to the contrary.

A fixed amount to which an employee is entitled on termination is considered to be either liquidated damages or a contractual sum to which the duty to mitigate does not apply. Mitigation is relevant only where the parties have not agreed in advance on a fixed amount, so that the employee is left to seek common law damages in lieu of reasonable notice.

It is counterintuitive and inconsistent for the parties to contract for certainty and finality and yet leave mitigation as a live issue, with the uncertainty, lack of finality, risk and litigation that may ensue as a consequence. Thus, if an agreement provides for a stipulated sum upon termination without cause and is silent on the obligation to mitigate, the employee will not be required to mitigate.

The reasoning of the Court of Appeal brings Ontario’s jurisprudence in line with appellate jurisprudence in a number of other provinces.

Implications for Employers

This Court of Appeal decision has now settled the law in Ontario regarding an employee’s duty to mitigate in the case of employment contracts with fixed notice periods: employees are now presumed not to be subject to a duty to mitigate unless stated otherwise in the agreement. In light of this decision, employers should consider clarifying the issue of mitigation when drafting employment agreements that provide for a fixed notice period (or payment in lieu thereof) on termination of employment without cause. And if employers intend employees to have a duty to mitigate, the contract should specify the reduction of notice period pay on account of mitigation. If employers intend post-termination non-competition restrictions to also apply, the terms and duration of those restrictions should be considered in conjunction with the mitigation obligation.

_________________________

1 2012 ONCA 425.

To discuss these issues, please contact the author(s).

This publication is a general discussion of certain legal and related developments and should not be relied upon as legal advice. If you require legal advice, we would be pleased to discuss the issues in this publication with you, in the context of your particular circumstances.

For permission to republish this or any other publication, contact Janelle Weed.